2018 (9) TMI 2108 - AT - Income Tax

Deemed divided addition u/s 2(22)(e) - assessee has received payment from company in which the assessee is one of the director - HELD THAT - The company Leela Tubes Private Limited set up a project at Daman in the year 2000-2011 with the help of bank finance and was also enjoying the working capital facilities. Initial couple of years were the period of establishing the product in market but during the year 2004-05, due to inability to retire the Letter of Credits opening by the Bank in favour of the suppliers of raw-material, there was very huge default and the company went into near bankrupt situation. The company was declared NPA. As a result, neither the bankers of the Company IDBI Bank Ltd. were giving the credit facilities and because of the defaults, the bankers were not allowing the company to pay to the creditors. As a result, it was very it was very difficult to get the raw-material from the market. Under the circumstances, the assessee asked his uncles and cousins to agree to permit him to offer as security the ancestral residence being Flat No.203 at Shripalnagar and avail the funding. In such fashion, some funding was availed from YES Bank and assessee opened a personal account and transferred the surplus funds of the company into his account and as and when the amount was falling due for payment he used to transfer back the amount to the account of company and make the payment and with working like this for a period of more than seven years, it is in the account year 2012-13, that old bank dues were cleared. In support of his contention, assessee filed a paper-book and also filed computation of income of the company at page No.50 for AY 2011-12 in which company is showing business losses. The assessee has also filed balance-sheet of the company for the year under consideration which shows trade payable. As we are of the considered opinion that assessee had received an amount rom M/s.Leela Tube Pvt.Ltd. (LTPL) in order to safe-guard the interest of the company and the same was done in order to protect the interest of the company and assessee even sought help from his relatives and placed as security the ancestral House being Flat No.203 at Shripalnagar, Ahmedabad. Therefore, in our considered opinion, this was for the business expediency and same cannot be treated as deemed dividend u/s.2(22)(e) of the Act. Thus, we direct the Assessing Officer to delete the addition - As a result, Assessee s ground of appeal is allowed.

Summary

Issues:
Interpretation of Section 2(22)(e) of the Income Tax Act - Treatment of payment received from a company by a director as deemed dividend.

Analysis:
1. Factual Background: The appeal was against the order of the Commissioner of Income Tax(Appeals) regarding the addition of Rs.10,80,994 made under Section 2(22)(e) of the Income Tax Act for the Assessment Year 2013-14. The assessee had received a payment from a company in which they were a director.

2. Assessee's Contentions: The assessee argued that the provisions of Section 2(22)(e) did not apply to the transaction in question. They explained that the funds received were for business purposes, with the company facing financial difficulties and the director taking steps to secure funding, including offering personal assets as security.

3. Revenue's Position: The Revenue disagreed with the assessee's contentions and held that the payment received fell within the scope of deemed dividend under Section 2(22)(e) due to the substantial shareholding of the assessee in the company.

4. Judicial Analysis: The Tribunal analyzed the circumstances, noting the efforts made by the director to secure funds for the company's operations during a challenging financial period. Citing a relevant judgment, the Tribunal concluded that the payment received was for business expediency and could not be treated as deemed dividend under Section 2(22)(e). Therefore, the Tribunal directed the Assessing Officer to delete the addition of Rs.10,80,994.

5. Decision: The Tribunal allowed the assessee's appeal, emphasizing that the payment received was in the interest of the company's business operations and not for personal gain. The order was pronounced in open court on 25/09/2018.

This detailed analysis highlights the key arguments, positions, and the ultimate decision of the Tribunal regarding the treatment of the payment received by the assessee from the company under Section 2(22)(e) of the Income Tax Act.